But Microsoft is also in a challenging position where it must avoid cannibalizing sales of its own lucrative desktop productivity suite ($20 billion in revenue forecasted for 2009), yet not lose out to online alternatives.

Sheri McLeish, analyst at Forrester Research, says that Microsoft's expansion of Office will be good for the industry and provide Microsoft with a worthy one-two punch.

"If we didn't have these free alternatives from Google and Zoho, surely Microsoft would not be doing this," says McLeish. "But all the competition in the productivity tools space benefits businesses and consumers."

Web-based apps a consumer thing for nowDetails about the features of Office Web Apps have been scant, but we do know that consumers must have a Windows Live account to access Office Web Apps. There are 400 million active users worldwide using the free Windows Live Online Service, according to Microsoft.

This is a way to drive people to the Bing search engine and other Windows Live online services, such as e-mail, storage, and blogging tools. Google has the same strategy of directing people to its search engine via Google Apps and its many other online services.

"I don't think we'll see a huge increase in the usage of Web-based versions of Office at enterprises," says McLeish. "Today businesses are still mostly using desktop tools and e-mailing files around. But Microsoft needed to have that Web-based option out there."

Office Web Apps' enterprise edgeAlthough Web Apps may be a better fit for consumers and enterprise adoption of online apps will be slow, the two worlds will blend eventually, says McLeish -- and this is where Microsoft will have an advantage over other Web-based alternatives.

"The big differentiator here is that Microsoft is providing more options to businesses in the ways which Web-based apps can be deployed," says McLeish.

For instance, for businesses licensed for Microsoft's Software Assurance maintenance program, it is not a requirement to access Office Web Apps through the Windows Live Online Service or through a subscription-based model. Microsoft is allowing companies with Software Assurance to run Office Web Apps as a free service within the company's firewall, and then give workers access to the apps via the Web. This will give skittish IT managers more control over potentially sensitive online content.

Also in Microsoft's favor is that consumers and business users may be more likely to use Office Web Apps because Microsoft Office already has broad reach on computers everywhere, with approximately 80 percent of businesses that run production tools using Office, according to Forrester data. This level of trust and comfort is a luxury that Google does not have.

McLeish notes that giving companies the option to run Office Web Apps behind the firewall may help convince them to use Web-based productivity tools because it "reduces risk for businesses managing online content."

Just as important, she says, is that Office Web Apps offers this feature and Google Apps and Zoho do not -- but maybe that won't last for long.

"They will probably catch up and offer the same thing soon," says McLeish.